From Max-EuP 2012

by Rainer Kulms

1. Comparative law and the institution of the trust

Trusts and their civil law equivalents (eg the Treuhand under German law) test the comparative law scholar’s imagination and ingenuity on how to cross the continental European divide between the law of property and the law of obligations. Prior to globalization, codified continental European laws had been unenthusiastic about business transactions involving trusts. Modern cross-border business, however, has become so frequent that civil law countries will have to take a more nuanced stance on trusts. The English trust has its origins in medieval history and the need to bestow rights in the same property on more than one person simultaneously. Its modern successors are crucial for estate planning schemes and investment vehicles. From a comparative law perspective, trusts and comparable civil law mechanisms, building on the fideicommissum and fiducia of Roman law, characterize legal institutions where, by unilateral declaration of the settlor or by bilateral inter-vivos agreement, assets or affairs have been placed under the control of a trustee (or, for example, a German law Treuhänder) for the benefit of a beneficiary or for a specified purpose.

Modern trusts in countries with an Anglo-Saxon legal tradition are vital for portfolio management and financial dispositions in a family context. The creation of a trust confers (legal and equitable) rights in the same property on two or more persons. The trustee is the legal owner of the property, but is required to hold it ‘in trust’ for the beneficiary. In terms of civil law doctrine, the beneficiary’s equitable interest goes well beyond a mere contractual (in personam) entitlement generated by the law of obligations. The beneficiary’s interest in the property is recognized by equity, thereby supplying him with a right in rem against the trustee’s creditors. If property items have been alienated subsequent to a breach of trust, the beneficiary may pursue a tracing claim against a defendant who did not act bona fide. From a continental European perspective, this is an actionable right that converts the beneficiary’s interest into a right with quasi-real features, reminiscent of civil law concepts of property.

Financial markets are so closely interwoven that a reassessment of the relationship between trusts and comparable civil law mechanisms that build upon fideicommissum and fiducia is imperative. Many investors subscribe to financial transactions structured around a trust although the legal orders of their countries of domicile have accommodated the English trust with little enthusiasm. Originally, cross-border investment elicited concerns on how to best defuse conflicts between trust arrangements under Anglo-American, common law and continental European legal doctrine. Now, regulatory competition forces a policy decision on national legislatures as to what extent current concepts of trust law or comparable civil law mechanism should be overhauled or substituted by foreign legal transplants.

2. Concepts of trust

The somewhat myopic focus on rights in rem aspects is commensurate with intellectual efforts to explore the elements of a trust by extolling its third party effects. Admittedly, this recognizes legitimate interests of the settlor and the beneficiary in deterring the trustee’s creditors from seizing trust property. But the focus on rights in rem predicaments jeopardizes a realistic assessment of the evolution of trusts. Trusts have emerged from their real estate origins, accommodating the needs of modern business transactions. Modern investment practice relies on trusts to generate the best available return for investors. Trusts as investment vehicles reshape the role of trust funds. The raison d’être of an investment trust is the maximization of trust funds by pursuing high-yield portfolio strategies for the benefit of beneficiaries. Traditional concerns of property law are of minor importance. Instead, creativity should be devoted to fleshing out the duties of a trustee since asymmetric information between the trustee, the settlor and the beneficiary is likely to affect returns.

a) English law trusts

Under English law, a valid trust may be created by a unilateral declaration (trust settlement) of the settlor, vesting the property in a trustee. The settlor may appoint himself as one of the trustees provided that there are third party beneficiaries. Where the settlor creates a trust of which a third party is a trustee, the trust will only be constituted if the legal title to the trust property is conferred upon the trustee. In order to achieve the objectives of the trust, the trustee is the legal owner of the property, owing a fiduciary duty of utmost good faith to the beneficiaries. The Trustee Act of 2000 establishes a statutory duty of care which does not alter the principles on the exercise of discretionary powers by trustees. However, the duty of care does not apply where it appears from the trust instrument that the duty is not intended to apply. A beneficiary has an equitable interest in the property. This equitable interest has proprietary elements, but it also places equitable obligations on the trustee. Thus, the equitable interest can be enforced against the trustee and—to a certain extent—against third parties. The concept of equitable interest is not a static one. Although the beneficiaries have proprietary interests in the trust fund, the trustees are nevertheless empowered to sell, transfer or deal otherwise with trust property. Therefore, the beneficiaries’ proprietary interests attach to whatever property constitutes the trust fund from time to time. Since the trustee is a common law owner of the trust fund, English law takes no interest in deciding whether a trust has legal personality or not.

Trusts may not violate the English law rule against perpetuities. However, the provisions of the Perpetuities and Accumulations Act of 1964 allow, inter alia, for a fixed perpetuity period not exceeding 80 years. In order to hold negative side-effects of long-term trusts in check, English courts have discretionary power to vary or revoke arrangements of the trust deed (including a modification of the trustee’s power), thus accommodating changing circumstances.

To implement the terms and conditions of the trust, the trustee may dispose of the trust property and obtain adequate insurance coverage. The trustee’s discretionary powers are restricted by a judge-made catalogue of fiduciary duties which essentially include a duty to safeguard financial interests of beneficiaries. The courts accept trust instruments whereby the settlor gives greater leeway to trustees provided that the core of fiduciary duties owed to beneficiaries remains unaffected. The trustee is under an obligation to discharge his duties honestly and in good faith. A breach of trust amounting to a loss suffered by the beneficiaries gives rise to an equitable right to compensation. Where specific restitution is not possible, the trustee is liable for paying compensation to the trust estate.

The Trustee Act of 2000 implicitly acknowledges the utility of private trusts for investment purposes. Trustees are endowed with a general power of investment that transcends the trustee’s traditional duties to invest trust funds. In making an investment decision, the trustee has to observe the standard of care of a prudent businessman. To dilute the risks associated with portfolio investments, the trustee must recognize the need for diversification and, where appropriate, seek professional advice. In recent cases, the courts have begun to embrace standards of current portfolio theory. Trustees will not be found to be in breach of their duties so long as an acceptable level of risk for the entire portfolio is maintained, notwithstanding a higher degree of risk for an individual investment taken in isolation. Nonetheless, this leaves trustees with a complicated message as capital markets become unstable and ‘safe’ investments less frequent. Trustees will find little manoeuvring space between insights from modern portfolio theory and traditional fiduciary law principles on investing trust monies.

b) Civil law analogies (fiducia and Treuhand)

A civil law fiduciary can actually do more than he is entitled to under the contract granting him the rights to manage or dispose of a trust fund. This somewhat paradoxical assessment clearly reflects the legal status of a fiduciary (Treuhänder) under German and Swiss law. 19th-century credit business in Germany had experienced a need for adequate protection similar to English floating charges. Academia reacted by engaging in a scholarly debate on the doctrinal position of a civil law trust (Treuhand). At the outset, Treuhandgeschäfte (deals establishing a civil law ‘trust’ (Treuhand)) were generally viewed as transactions relegated to the realm of the law of obligations. Thus, restrictions stipulated under a Treuhand contract (a transaction establishing a civil law ‘trust’) were thought not to create third party effects, thereby generally denying the beneficiary a right to trace alienated trust property. In this, the Treuhand is strongly reminiscent of the fiducia cum amico of Roman law origins: a piece of property was placed by the owner under a friend’s custody, the latter to hold and manage such property for a stipulated period of time and to return it thereafter. The raison d’être for this transaction is the owner’s temporary incapacity to manage the piece of property himself.

For a long time, continental European legal thinking considered Anglo-Saxon trusts as a major challenge to the property law concept of numerus clausus, ie the parties to a contract could not by private contracting add a new type of real or personal property (immovable or movable property) to the statutory menu of recognized forms of property). Regrettably, this intellectual self-restraint was adopted at the expense of in-depth analysis of the duties owed by a civil law fiduciary towards the ‘settlor’ and the beneficiary under the law of obligations. Change came as soon as the financial industry began to rely on trusts as investment vehicles for portfolio strategies. Scholarly debate refocused on the trustee’s investment strategies and risk assessment criteria. This is not to suggest that, for continental European thinking, the problems associated with third-party effects of fiduciary relationships have subsided upon the advent of modern investment funds. But there has been a snowballing effect of fiduciary structures for pension and other investments funds. As a corollary to this development—extra-legal—reputation mechanisms may be expected to spread and outweigh in rem deficiencies of civil law protection for ‘settlors’ and beneficiaries. Conversely, reputation mechanisms are likely to operate in the interest of civil law beneficiaries where, under English law, the beneficiaries’ proprietary interests would attach to whatever property constitutes the trust fund from time to time (a proprietary concept that a civilian code would reject).

The German Civil Code in § 137 Bürgerliches Gesetzbuch (BGB) enshrines the concept of inter partes effects of an obligatory contract (ie a contract generating in personam rights under the law of obligations). Nonetheless, German courts have carved out a number of exceptions, affording the ‘settlor’ adequate protection against the execution of certain judgments. It should be noted that German insolvency law shows little inclination to award in rem status to trust property (ie treating it as segregated property). If the fiduciary is insolvent, the ‘settlor’ may seize the property, shielding himself against the claims of the fiduciary’s creditors. If a judgment is executed against the fiduciary’s property, the ‘settlor’ may ask the court to restrain the creditor from disposing of a piece of the trust property (so-called Drittwiderspruchsklage). Scholarly debate has yet to master the challenge of translating the English trust law concept of tracing into civil law doctrine.

c) Mixed legal systems and modern codifications of trust law

Mixed legal systems such as Scots law (Scottish private law), South African law and the droit privé of Quebec had to bridge the divide between English trust law and continental European or Roman law concepts of property. The concept of ‘trust’ under Scots law indicates a situation in which persons designated as ‘trustees’ administer the property of others without being vested with the property. Under the growing influence of English law, scholars came to note the common origins of trusts and the fideicommissum of Roman law. In fact, transactions based on a fideicommissum operated very much like those involving a trust. Under the Trusts (Scotland) Act of 1921, a trust is constituted inter vivos by a deed or other writing.

In view of its civil law property traditions, Scots law treats trusts as a category of their own, rejecting the English doctrine of legal and equitable estates. There is no co-existence between legal and beneficial rights as between (an English) trustee and (an English) beneficiary. The trustee has full legal title to the property. The beneficiary is endowed with a right in personam against the trustee to enforce the performance of the trust. Nonetheless, Scots law confers a ius crediti or a ius in rem on beneficiaries, affording them a certain degree of protection against the trustee’s creditors in his sequestration. A bona fide purchaser may validly acquire a full legal title to a piece of trust property, sold by the trustee in breach of the terms of trust. However, if the third party took trust property mala fide or gratuitously, or the trustee’s creditors attach it, the beneficiary’s right will survive. The beneficiaries’ rights take precedence over the claims of the trustee’s personal creditors. Beneficiaries’ rights extend to property representing trust property, ie property acquired by trust property. With respect to tracing, Scots law establishes a delicate balance between the legal title of the owner and beneficiaries’ legitimate interest to recover alienated pieces of trust property in court proceedings. If the trustees refuse to recover trust property they can be forced to lend their names to the beneficiaries who wish to raise an action.

Under South African law, the creation of an inter vivos trust does not take effect upon a unilateral declaration of the founder. Instead, it is usually created by way of a contract containing a stipulation in favour of the beneficiary. Upon acceptance, the beneficiary acquires a right under the trust. A South African trust has its roots in the law of contracts although it may not be classified as a species of contract. The trustee is the sole owner of the trust property although statutory law prescribes that trust property and the trustee’s personal estate are separate. In case of breach of the trust, the beneficiary is entitled to sue the trustee for losses suffered. The beneficiary may by court order restrain the trustee from alienating trust assets if it can be established that the trustee is about to do so. A tracing order is unknown in South African court practice.

In codifying the law on the fiducie, Quebec has rejected foreign legal transplants, classifying trust funds as property assets without a legal owner (patrimoine d’affectation), thereby excluding the fiduciary from acquiring a legal title of an in rem nature. The creation of a trust does not confer in rem rights on beneficiaries. Beneficiaries have to raise claims relating to trust assets against the current holder of the office of fiduciary. With respect to tracing alienated property, Quebec law has shaped beneficiaries’ procedural rights in accordance with the Scottish pattern. If the fiduciary refuses to commence legal proceedings, beneficiaries are entitled to recover alienated trust assets on his behalf. Since the trust assets form a patrimoine d’affectation without conferring a legal title on anyone, the settlor’s, fiduciary’s or beneficiary’s respective creditors may not attach trust assets.

The statutory language of Liechtenstein law (Personen- und Gesellschaftsrecht) does not indicate whether the fiduciary (Treuhänder) acquires legal title to the trust funds or whether he is relegated to administrative rights with in rem elements. Nonetheless, the trust assets constitute a legally separate fund to which specific in rem powers of the trustee attach. According to academia and Liechtenstein private law practice, the fiduciary must possess a full ownership title to immovables whereas there is no such strict requirement for other proprietary rights or interests. Liechtenstein law conditions the valid creation of trust on a contract (under the law of obligations) and a concurrent transfer of in rem proprietary rights. There is no rule against perpetuities. Modelled upon English law patterns, beneficiaries enjoy a right of tracing. However, this right is available only if the fiduciary’s disposal of trust property amounts to a breach of trust.

With respect to modern continental European codifications on trusts, Luxembourg law and Swiss private international law rules should be noted. Luxembourg has added the trust to its menu of private law entities, confining it to investment transactions where only financial institutions may assume the office of a trustee. Swiss private international law acknowledges the implications of Switzerland becoming a signatory to the Hague Convention on Trusts (see section 4. below). Swiss law recognizes non-domestic trusts as entities of assets with partial legal personality, but does not go as far as amending private law rules of substance and the civil law concept of numerus clausus in property law.

3. Regulatory perspectives on trusts and civil law analogies

Modern comparative law thinking on trusts and their civil law analogies has accepted the challenge of investment funds and portfolio theory by emphasizing a functional perspective. Differences between Anglo-Saxon and civil law concepts have come to be neglected over an approach informed by the theory of contract. Business transactions involving trusts or their civil law counterparts are seen to be reflecting a division of labour between trustees, fiduciaries and investors. In this context, a need is felt for clarifying standards on investment strategies for trust funds, including beneficiaries’ rights in relation to such investments, tracing and the protection of trust property against third parties. Nonetheless, there is no common leitmotif for ascertaining the doctrinal core of the law on trusts and their civil law analogies. In Anglo-Saxon countries, it has not been ignored that the emphasis on private contracting aspects tends to obscure the clear distinction between common law rights and equitable interests. A more cautious approach is suggested in order to avert attempts to by-pass the core of trust law and its protective effects. Current Liechtenstein court cases appear to be motivated by similar concerns. There is a policy debate in the principality as to whether specific capital market law rules are apposite to address deficiencies of the current statutory regime on trusts and their equivalents.

Scholarly civil law analysis reviews continental European legal orders in order to establish a modus vivendi between English trusts and modern continental European successors to fiducia and fideicommissum. This includes an assessment of traditional conflict of law rules of private international law, public international law instruments and new codifications of substantive law. Mixed legal systems indicate that a pragmatic modus vivendi might be more helpful. In fact, they support an argument in favour of a coexistence between Anglo-Saxon concepts of trust and their civil law counterparts that is acceptable without blurring the line between the civil law concepts of the law of obligations and property. Private practice suggests that the predicament of cross-border businesses is of a slightly different nature. Continental European legal systems are far from adopting a harmonized approach, preferring to either recognize a non-domestic trust created by their own residents or convert such a trust into an equivalent entity as supplied by the respective national private law statute.

4. Uniform law: the Hague Convention on trusts

The Hague Convention on the Law Applicable to Trusts and on their Recognition of 1 July 1985 reflects a request of common law countries for uniform rules on trusts. For continental European systems, the Convention on Trusts offers an opportunity to master the dynamics of global financial markets without surrendering established civil law traditions. Since 1985, Australia, Canada (excluding Ontario and Quebec), Italy, Liechtenstein, Luxembourg, Malta, Monaco, the Netherlands, San Marino, Switzerland and the United Kingdom (including Hong Kong) have ratified the Convention on Trusts. Under the Convention, a trust defines a legal relationship created—inter vivos or upon death—in writing, placing assets under the control of a trustee. The assets constitute a separate fund, independent of the trustee’s personal estate. The trustee has power to manage or dispose of the assets in accordance with the terms of the trust and statutory law. The Convention does not advance a comprehensive definition of trust or minimum standards of mandatory law. It focuses on laying down conflict of law rules in order to foster recognition of trusts by those jurisdictions that lack a tradition in this Anglo-Saxon institution. National policy choices on property law concepts remain unaffected, including the traditional continental European reluctance to expand the proprietary or in rem aspects of English trusts. At the same time, the Convention encourages the signatories’ courts to give the greatest possible effect to the terms of the trust. As a minimum of recognition, courts have to treat the trust property as a separate fund, acknowledge that the trustee may sue and can be sued and that he has the capacity to appear before a notary. The signatories may disregard the Convention where its application will be manifestly incompatible with public policy (ordre public). Eventually, the Convention should incentivize continental European lawyers to ascertain the core of national property law concepts, thus facilitating a debate on whether foreign trust laws fail to afford equivalent standards of protection. Any contracting state may declare that the provisions of the Convention will be extended to judicially declared trusts (eg constructive trusts).


Frederic William Maitland, ‘Trust and Corporation (1911)’ in David Runciman and Magnus Ryan (eds), Maitland, State, Trust and Corporation (2003), 75; WA Wilson and AGM Duncan, Trusts, Trustees and Executors (1995); Maurizio Lupoi, Trusts—A Comparative Study (1997/2000); Richard Helmholz and Reinhard Zimmermann, Itinera Fiduciae—Trust and Treuhand in Historical Perspective (1998); DJ Hayton, SCJJ Kortmann and HLE Verhagen, Principles of European Trust Law (1999); Michele Graziadei, Ugo Mattei and Lionel Smith, Commercial Trusts in European Private Law (2005); André Prüm and Claude Witz, Trust et fiducie—La convention de la Haye et la nouvelle legislation luxembourgeoise (2005); Rainer Becker, Die fiducie von Québec und der trust (2007); Peter Max Gutzwiller, Schweizerisches Internationales Trustrecht (2007); Philip H Pettit, Equity and the Law of Trusts (11th edn, 2009).

Retrieved from Trusts – Max-EuP 2012 on 21 May 2024.

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